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Financial emigration: What every South African needs to know about liquidating investments

EDINBURGH — Financial emigration is a complex business, with many unexpected costs as you sever the ties with South Africa. Many people don’t officially emigrate, finding it easier to slowly liquidate assets and shift funds offshore. Financial advice in this arena doesn’t come cheap. Expect to pay anything from R15 000 to R50 000 to have your portfolio assessed and smart plans put into place to liquidate investments. In this article, Johannesburg-based independent financial adviser Dawn Ridler generously shares her expertise. She provides pointers on what to think about as you weigh up whether you should sell property and cash in long-term savings. – Jackie Cameron

By Dawn Ridler*

Whenever uncertainty increases, South Africans start looking at how liquid they are if they want to get up and go, and this is one of those times. Noises from the government recently indicate that that they want to ‘document’ emigration to prevent it (a complete non-starter and just more jobs for pals).

Financial emigration
Money expert Dawn Ridler shares some insights on financial emigration.

Emigration of educated youngsters has been happening for decades, and because they have very little in the way of assets they do not have to ‘financially emigrate’. Those stats are ‘hidden’ and become part of the brain drain because those youngsters just cannot find the jobs they want here. For older and more established South Africans though, emigration – as opposed to a leave of absence to work outside the country – comes with a myriad investment or disinvestment decisions that need to be made. This is also known as official or financial emigration.

Capital gains tax: One factor many emigrants do not consider is that emigration triggers Capital Gains Tax (CGT), whether or not you leave your investment or property here. If you merely work elsewhere but remain a South African resident (as many people do if they work in Dubai for example) then this does not apply.

Be aware though that the government is itching to bring those ‘tax-free’ earnings into the RSA tax net. Capital Gains Tax was initially introduced to replace Estate Duty, but I am sure it is of no surprise that not only do we have both but CGT is creeping up steadily and is now a nasty corroder of any investment. Have a look at the maximum rate increase over the last few years. (this is assuming you are taxed at the top tax bracket of 40+%)

​Type 2018​* ​2017 ​2016 ​2015 ​2014
​Individuals and Special Trusts (disability) ​18% ​16.4% ​13.65% ​13.32% ​13.32%
​Companies ​22.4% ​22.4% ​18.65% ​18.65% ​18.65%
​Other Trusts ​36% ​32.8% ​27.31% ​26.64% ​26.64%

If you’re thinking of financial emigration, and if you have a large property or stock portfolio, I recommend you make yourself familiar with CGT. You can get a simple 15-page brochure on it here. There is of course the 800+ page brochure available too if you’ve run out of sleeping pills.

Working out CGT is not simple and is a multistep calculation, as you will discover if you read the brochure, so I recommend you get your tax advisor or Certified Financial Planner ® to do this for you (your broker probably won’t be able to help you). There are two aspects to capital gains: the ‘inclusion rate’ (the percentage of the capital gain that is used in the calculation) and your marginal tax rate.

Flexible investments: These are relatively easy. Either you leave it or sell out and use your Forex allowance to take it out – either way you’ll have to pay Capital Gains Tax on shares or unit trusts. If you leave it here, you’ll have to keep submitting returns and paying tax, but if you move to a country that has a tax agreement with RSA, then the tax paid here will be a credit on the other side so double tax is not paid.

Pension and Provident preservers: These are put in place (with the help of a financial advisor) in order to preserve the tax status. If you withdraw from that fund (one withdrawal before retirement (age 55) is allowed – it can be the full amount) but is taxed according to lump sum withdrawal tables. A R25 000 lifetime tax free amount, and thereafter a sliding scale starting at 18% and going up to 36%. If you officially emigrate, Pension Preservers can also be left and handled at retirement or age 55 – but that involves substantial administrative PT, especially if you do not have an RSA bank account. Hint, keep one in place if you go this route, even if it is a cheapo like Capitec. Depending on the size of the preserver, tax could take a sizable chunk out of your investment. You still have the option of never retiring from it, in which case it will go into your estate.

Retirement Annuities: Prior to March 2016 it was not possible to take a lump sum from an RA on emigration, but it is now treated in the same way as a Preserver, but you have to prove that you are formally/financially emigrating (which is not the case with a Preserver). This is treated as a pre-retirement lump sum withdrawal and taxed accordingly. Your financial advisor will be able to work out the exact tax impact. If you are over the age of 55 it might make more sense to ‘retire from’ the fund, take the R500,000 tax free lump sum ( lifetime amount) and have the compulsory annuity pay out at the full 17.5% of the investment, once a year. The capital amount left will probably be depleted in 7 years or so. You will need to keep a local bank account to accept those funds. If you’ve been lumbered with an RA on an insurance platform (as opposed to LISP) then you may be have some nasty termination penalties over and above this. Neither RAs nor Preservers can be ‘transferred’ offshore and keep their tax status.

Financial emigration: Should you make the move?

The forex allowances are still pretty generous even if you don’t emigrate. If you want all the small print, then go here. In summary, you can invest R10m offshore every year, in addition to the R1m ‘single discretionary allowance’. Once you have been out of the country for 181 days then the income you earn is not taxed here (although that could go away if SARS has its way).

If you take the potential CGT tax bill into play in addition to the penalties and lump sum withdrawal taxes, especially if you have a property portfolio you are going to keep, it might make sense to not officially emigrate. Either way you do not have to give up your South African citizenship unless it is required by your adopted country should you become a citizen there (not every country allows dual citizenship).

Action: I recommend that you have a full financial plan done, by a professional, looking at the financial impact of officially emigrating or not. The fee for this will probably run from about R15 to R50k depending on how complicated your affairs are. Whether or not you are thinking of emigrating, the sooner you can determine the ‘base cost’ of your properties the better (especially if pre-1/10/2001). Keep invoices of all capital expenses on such properties as these can whittle down the CGT bill when you eventually sell.

Dawn Ridler is an Independent Financial Advisor with extensive experience in both financial advisory and business. Her unusual combination of an MBA, BSc and CFP ® has evolved into an ‘ecological’ and holistic approach to advisory, which she has tagged ‘Wealth Ecology’ in her company, Kerenga.

  • This article on financial emigration is published here on BizNews.com with the kind permission of Dawn Ridler. Copyright: Dawn Ridler

Also by Dawn Ridler:

How to take the emotion out of investing

10 numbers you absolutely need to know to grow your personal finances: Dawn Ridler

  • This story was updated on 19 June. The “life time tax free allowance” applicable upon pre-retirement withdrawal of pension and/or provident fund assets is R25,000.
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